Higher than expected build in crude inventories is bearish indicator for crude prices and stocks

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On January 24, the US Department of Energy (DOE) reported a build in crude oil inventories of 2,813 thousand (or 2.8 million) barrels. This was higher than the average of analyst estimates of 2,150 thousand (or 2.2 million) barrels. A build in inventories is indicative of either less demand or more supply, and therefore a higher than expected build in inventories is a bearish indicator.

Despite the bearish indicator, prices were up on the day and some market reports cited positive economic indicators such as US employment figures. Additionally, on Wednesday crude prices already moved down as the American Petroleum Institute also reported a significant build in inventories. Both the Department of Energy and the American Petroleum Institute report inventory figures, the difference being that one is a governmental organization (DOE) and one is an industry organization (API). The API’s and DOE’s figures are often directionally the same, but do not necessarily move the same way every week. Both organization’s figures are based on surveys of market participants, and do not necessarily capture the entire market which is the reason for the reporting differences.

From a longer term perspective, one can see in the below graph that crude inventories are currently much higher than they were in the past five years at the same point in the year.

There has been a surge in US crude oil production over the past several years, and it is possible that inventories have built because much of the excess refinery and takeaway capacity has been soaked up and it will take time and capital for more to come online. Worldwide crude prices have remained high, however, the US crude oil benchmark of West Texas Intermediate (WTI) remains significantly below similar grades of oil around the world. Continued stronger-than-expected builds of US inventories could push the spread between WTI and international grades (such as Brent crude) wider, and also have the effect of dampening global oil prices.

WTI price movements and broader oil price movements have an effect on producers of crude oil, as higher prices result in higher margins and earnings. Names with portfolios slanted towards oil such as Oasis Petroleum (OAS), Denbury Resources (DNR), Chevron (CVX), and Exxon Mobil (XOM) could see margins squeezed in a lower oil price environment. Additionally, oil price movements affect energy sector ETFs such as the Energy Select Sector SPDR Fund (XLE), an ETF that includes companies that develop and produce hydrocarbons and companies which provide services to them.